A number of states have enacted Domestic Asset Protection Trust (DAPT) legislation.  Ohio may soon join those states.  These statutes authorize what are known as "self settled" trusts.  This essentially means that the person setting up the trust is also one of its beneficiaries.  Thus, the person setting up the trust is attempting to protect some of his or her own assets (in addition to possibly protecting the assets for one or more other beneficiaries).

As I have noted in other posts, there is still not a single reported court decision in the United States that specifically upholds this kind of trust.  This is one of the reasons that I have been advising my clients not to put too large of a percentage of their assets into a DAPT.

Another significant consideration is that a bankruptcy trustee can challenge a conveyance to a DAPT within 10 years of the time it is made.  While 11 U.S.C. §548(a)(1) provides a general two year time frame in which a trustee can challenge alleged fraudulent conveyances, section (e)(1) provides a 10 year period with respect to self-settled trusts.

One of the goals of asset protection planning is to make sure that you do not end up in bankruptcy.  But it is obviously impossible to know in advance whether a future bankruptcy might be necessary.  Thus, 11 U.S.C. §548(e)(1) should be a very important consideration in deciding how much to contribute to a DAPT (and whether to form one in the first place).

A so-called umbrella policy can provide substantial insurance coverage at a modest cost.

There are many reasons you need to protect your assets.  We often focus on business and professional risks, economic problems, divorce and other catastrophic events.  But disaster frequently strikes from much more routine events — like an auto accident.

Let’s say you accidentally injure one or more people in an auto accident.  You have $300,000 in liability insurance coverage.  But the medical bills of the injured parties are closer to $1 million.  It is quite possible that you could eventually lose your house or other assets in such a situation.

An umbrella policy provides excess insurance over your auto and home owners policies.   Generally, claims settle at lower amounts.  So the additional protection does not cost as much as the first level protection.  Also, an umbrella policy covers multiple risks (such as auto accidents and accidents in your home).

I advise clients with respect to some rather sophisticated asset protection techniques.  But you should not overlook the basic protections provided by some very simple, reasonable and relatively inexpensive alternatives — like an umbrella insurance policy.

As I mentioned in a post last March most of us now have multiple on-line accounts; and very few people consider what happens if they die and no one can access those accounts.

One of my associates, David M. Lenz, recently published an excellent article on this topic titled "Afterlife on the Cloud".  As Dave mentions, we are increasingly living in an electronic world.  When death comes, a person may now leave behind many digital items that contain valuable information — and which may have intrinsic monetary value.  In many instances, failure to do any planning with respect to these digital items can create a huge problem.  And the inability of your executor or other personal representative to gain timely access to your digital accounts could leave them more vulnerable to creditors.

At any rate, planning for digital assets is now essential from both an estate planning and asset protection standpoint.

Last month, the Ohio House of Representatives passed House Bill 479, which I have discussed in posts on May 1, 2012 and May 23, 2012.

If the Ohio Senate goes along with the House, there will be a new Section 5816 of the Ohio Revised Code that provides for the Ohio Legacy Trust Act.  This will be a form of a so-called domestic asset protection trust.

Keep in mind that the Ohio Senate could amend the House version, and the final result is still uncertain.  And even if Ohio enacts a Legacy Trust Act, there will undoubtedly be various court challenges to parts of that legislation.

This is a rapidly developing area of law.  There is a constant tug of war between those who are trying to collect debts and those who are trying to protect various assets.  The tug of war will be continuing for quite some time.

In my post of May 1, 2012, I reported that there was pending legislation in Ohio (House Bill 479) that would essentially provide an unlimited homestead exemption, similar to that in Florida, Texas and several other states.

On May 22, 2012 the Ohio House of Representatives passed House Bill 479, but it had significant changes from the original version.  The original proposal was amended to provide a complete exception for the state of Ohio and all its political subdivisions.  The proposed full homestead exemption was also amended to provide a maximum exemption of $500,000 per person.  It is important to note that this is still proposed legislation.  The legislation is currently before the Ohio Senate, and there are likely to be further changes.

The Ohio Creditors’ Attorney Association and others are fighting the homestead exemption and other parts of the proposed law.  There is still no assurance as to what the ultimate outcome will be.

I will continue to monitor this very significant proposed legislation.

 Asset protection statutes and case law vary significantly from state to state.

  • More than ten states have enacted Domestic Asset Protection Trust (DAPT) legislation; but most states have not.
  • There is still not a single reported court decision upholding (or striking down) DAPT legislation.  Not only can state statutes vary, but in the future, case law in each state could be very different.
  • Some states have much better LLC protections than others.  State laws are constantly changing.  For example, Ohio recently passed legislation that provides significantly better protection for LLC members.
  • IRA protection depends to some degree on state law (particularly with respect to inherited IRAs).
  • Protection of life insurance from creditors also varies state by state.

The list could go on.  Some matters (such as 401(k) plans) are governed by federal law.

Asset protection attorneys therefore need to keep current on various state law developments in order to utilize the best strategies for clients.

 

As reported by Peter Lattman in The New York Times yesterday and today, a major New York law firm — Dewey & LeBoeuf — is on the verge of bankruptcy.  The firm was aiming to become a global powerhouse in corporate law.  At its peak, it had more than 1,300 lawyers in 26 offices all over the world.  It appears to have taken on too much debt; expanded too rapidly; and is on the verge of collapse.

Many individuals and business have gone bankrupt in recent years.  The collapse of a giant international law firm is a grim reminder that any of us can suddenly find ourselves in totally unexpected financial trouble.  Having a reasonable asset protection plan in place prior to any such problems can be a huge benefit.  If even a giant law firm can collapse within a very short period of time, it is obvious that no business or individual is immune from unexpected financial distress.

Ohio House Bill 479 — commonly known as the Ohio Asset Management Modernization Act (OAMMA) –would make Ohio a leading asset protection jurisdiction.  The proposed legislation would:

  • Permit a so-called Domestic Asset Protection Trust (DAPT).
  • Provide an essentially unlimited homestead exemption, similar to those in Florida, Texas and several other states.
  • Specifically protect inherited IRAs.
  • Specifically protect 529 plans from a plan participant’s creditors.
  • Make some other changes that would help make Ohio one of the better asset protection jurisdictions in the country.

This is proposed legislation.  As explained recently by Akron Legal News, sponsors of the proposed law argue that it would allow Ohio citizens and business owners to better protect their assets.  It would also provide a legal environment that is favorable to the expansion of banking and trust business.  But it is still too soon to predict whether the proponents of the new legislation will ultimately be able to get it enacted.

Following up on my post of April 13, 2012 —

Ohio House Bill 48 (which becomes effective on May 4, 2012) makes important changes to Sections 1705.18 and 1705.19 of the Ohio Revised Code.  A new Section 1705.19(C) provides:

No creditor of a member of a limited liability company or any member’s assignee shall have any right to obtain possession, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.

Section 1705.19(B) strengthened Ohio’s charging order protection.  The new subsection (C) makes it even clearer that a creditor of a member simply cannot exercise legal or equitable remedies against the property of the limited liability company.

As I noted in my earlier post, these new provisions make Ohio LLCs much more appealing from an asset protection standpoint.

 

 

A front page article in yesterday’s New York Times (by Jessica Silver-Greenberg) reports that hospital patients waiting in an emergency room (or even convalescing after surgery) may find themselves confronted by a debt collector — right in the hospital!  The Minnesota attorney general, Lori Swanson, claims that one of the nation’s largest medical debt collectors (Accretive Health) was engaging in such practices.  The Minnesota attorney general has not yet filed any formal action.  But her comments have raised concerns that such practices may have become common at various hospitals across the country.

I served on a hospital Board of Trustees for ten years, and I am certainly sympathetic with the increasing financial pressures faced by hospitals nationwide.  Hospitals obviously have to employ various tactics to collect debts.  It seems, however, that some hospital collection efforts may be crossing the line of what is reasonable.

The New York Times article is another vivid reminder that debt collectors in general are getting more and more aggressive.  Focusing on asset protection (including insurance needs) before a problem arises is more important than ever.